Are collateral warranties construction contracts under the Construction Act?


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For further information, please contact David Weare, Partner, Fladgate LLP (dweare@fladgate.com)


 

This question was addressed for the first time in a recent judgment of Mr Justice Akenhead in the Technology and Construction Court. In a decision likely to have wide-ranging consequences for construction, the ruling indicates that collateral warranties can be considered a construction contract under the Housing Grants etc. Act (Act). Though the court was at pains to emphasise that each individual case would be decided on its merits, it has the potential to cause considerable problems for the industry in the future.

The facts

Parkwood provided leisure and facilities management services to the Cardiff City Council-owned Cardiff International Pool. The council had let this facility to Orion Land and Leisure, who engaged Laing O’Rourke under a standard JCT design and build contract to complete the design of the facility and carry out various construction works. Orion then let the facility to Parkwood.

Alleging various delays and defects within the works, Parkwood claimed Laing had breached their duty of care under the collateral warranty between them.

The decision

In holding that the collateral warranty amounted to a construction contract for the purposes of the Act, the court relied on three main factors: statutory interpretation, the construction of the wording of the warranty, and the fact that it was entered into before practical completion.

The Act defines a construction contract as an agreement for “the carrying out of construction operations”. The court said that these words were unambiguous. It must therefore be primarily the terms of the contract entered into between the parties that determine whether it is one for the carrying out of construction operations. In construing the warranty, the court held that the warrantor was taking on an obligation to carry out works rather than giving a guarantee of past performance or quality.

Commentary

This decision is surprising, for various reasons. Firstly it may be stretching the definition Parliament intended to claim that a collateral warranty is for “carrying out construction works”. This would imply that beneficiaries have rights which they do not actually have: for example, to instruct how the works are carried out, or to order termination or a variation. Similarly, if the primary contract is terminated, then the beneficiary (unless it has step-in rights) is unable to insist the works are completed.

Secondly, the court arguably attached undue significance to the phrase “warrants, acknowledges and undertakes”, holding that each verb must have a different meaning. It is hardly unknown for lawyers to use multiple words to say essentially the same thing.

Lastly, the court seems to have paid insufficient heed to the words “…the Contractor shall have no liability…in respect of any delay in the progress and/or completion of the Works”. This means that timely performance cannot be enforced, which is one of the key components of any construction contract.

The implications

The majority of collateral warranty claims are likely to arise after the works have been completed. The court indicated that where the works are completed and the contractor is simply warranting a past state of affairs, the warranty may not be a construction contract. So should the completeness of the works be assessed at the time the warranty is entered into or at the time the claim is brought? In the latter case, a warranty might initially be a construction contract at the time it is entered into, but cease to be so once the works are completed.

If a collateral warranty is held to be a construction contract for the purposes of the Act, a beneficiary can pursue its claim in adjudication. This is unlikely to be an appealing prospect for warrantors, and in particular their insurers. The result may be increased resistance from contractors and consultants to enter into collateral warranties and, perhaps, increased take up of rights under the Contracts (Rights of Third Parties) Act 1999, as adjudication is less likely to apply to third party rights. There is also likely to be increased scrutiny of the language of collateral warranties so that terms such as “undertakes”, which may encourage the court to construe a warranty as a “construction contract”, are avoided.

For beneficiaries, the prospect of obtaining a quick and enforceable decision by means of adjudication may seem superficially attractive, but the majority of collateral warranty claims are likely to involve negligence, and the courts have previously stated that a complex claim involving allegations of professional negligence is best suited to arbitration or litigation, although that will not in itself prevent the court from enforcing the adjudicator’s decision. However, the adjudicator, faced with an almost impossible time period, may be unwilling to make a finding of negligence, leaving the claimant no further on.

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